Selecting a fiscal year for a business affects your accounting and tax planning.
Here’s how to determine your fiscal year as well as how to decide whether you should use fiscal-based or calendar-based reporting for your taxes.
What Is a Fiscal Year?
In an accounting context, a fiscal year for a business is the 12-month period that defines a company’s annual financial reporting cycle. It is defined by the dates you use to mark intervals between annual financial reports such as profit-and-loss, balance and cash-flow statements.
In a tax context as defined by U.S. Revenue Code Section 441, hosted on the Cornell Law School website, a fiscal year is a 12-month period ending on a day other than Dec. 31 which marks the beginning and end of a company’s annual tax reporting cycle. In contrast to a fiscal year as defined in accounting, a fiscal year defined for tax purposes can’t end on Dec. 31.
Businesses use fiscal years internally for accounting and financial planning. Fiscal years are used externally for reporting to investors and tax reporting.
Fiscal Year Calendars
A fiscal year calendar is named based on the date or year when it closes, known as the fiscal year-end.
For example, let’s say you started your business at the beginning of April 2021 and the closing month of your accounting year and tax year will be March 2022. You could refer to this period as the fiscal year ending March 31, 2022 or as fiscal year 2022, commonly abbreviated as “FY 2022” or “FY22.”
Note that under this terminology, your current fiscal year can be the following calendar year if your present fiscal cycle will not end until the next year.
Quarters within fiscal year dates are named fiscal quarters. They are marked by 3-month periods and named by citing the quarter and date or year when they end. For example, the fourth fiscal quarter of fiscal year 2022 could be named as “Q4 2022,” “Q4/22” or “Q422.”
What Is the Difference Between Fiscal Year and Calendar Year?
When fiscal years are used for tax reporting purposes, they are defined in contrast to calendar years, based on definitions given in U.S. Revenue Code Section 441.
Under this section, a calendar year is defined as a 12-month period ending on Dec. 31, while a fiscal year is any 12-month period ending on the last day of any month other than December.
In other words, you’re either using a calendar year that ends on Dec. 31 or a fiscal year that ends on some other day of the year. This means that your annual tax reporting cycle, referred to by the IRS as your tax year, can either be a calendar year or a fiscal year.
Using Fiscal Years for Tax Reporting
If you use a fiscal year for tax reporting, it is used as a basis for calculating tax filing deadlines and extensions. Whereas annual taxes normally are due April 15 on a calendar year tax year cycle, with a fiscal year tax year, your annual tax filing is due on day 15 of the fourth month after the end of your fiscal year, according to the Internal Revenue Service (IRS).
The IRS generally requires businesses that are taxed as sole proprietorships, including single-member limited liability companies (LLCs), to end their annual financial reporting cycles on Dec. 31 to coincide with the end of the calendar year used for personal taxes. However, individuals can use a fiscal cycle that ends on a different day if they maintain their books based on that fiscal cycle.
C corporations can decide whether to use a calendar year or fiscal year tax reporting cycle, and they set their decision when filing their first tax return as a business. Partnerships, S corporations and personal service corporations must use a required tax reporting cycle stipulated by the Internal Revenue Code unless they file a Form 8716 requesting a change under U.S. Revenue Code Section 444. Normally, partnership tax years are based on the tax years of the company’s partners, while S corporations and personal service corporations must use calendar years unless they file for exceptions.
If you start using a fiscal year for tax reporting and you later want to change your annual tax year deadline with the IRS, you will need to fill out a form to request permission from the IRS, and you will be required to change your fiscal year for consistency with your new tax year cycle. In general, you would use a Form 1128 for this, but partnerships, S corporations and personal service corporations use a Form 8716 for certain situations.
Some businesses may elect to end their fiscal year on the same day of the week each year, such as the Friday closest to Dec. 31, typically to avoid having a fiscal year end on a weekend. When this method is used, some fiscal years will have 52 weeks, while some will have 53.
When Does the Fiscal Year Start?
Your fiscal year starts on the first day of the 12-month period which defines your fiscal year. It can be any day of the year other than Jan. 1, since Jan. 1 would start a calendar year.
When Is the End of the Fiscal Year?
The end of your fiscal year is the last day of the 12-month period which marks the end of your financial year. It can be any day of the year except Dec. 31.
Should I Use a Fiscal Year or a Calendar Year?
Whether you should use a fiscal year or calendar year for your tax year depends partly on what tax regulations apply to your business and partly on your business model.
IRS regulations state that in general, anyone can use calendar tax years, but certain tax filers must use calendar years. You must use a calendar year for your tax year if:
- You don’t keep books or records
- You don’t have an annual accounting period
- Your current tax year doesn’t qualify as a fiscal year
- You’re required to use a calendar year by a provision in the Internal Revenue Code or Income Tax Regulations
In application, this means that in general:
- Taxpayers taxed as individuals, including single-member LLCs, must use calendar years as tax years unless they maintain their books on the basis of fiscal years
- C corporations can choose between calendar years and fiscal years
- Partnerships, S corporations and personal service corporations must follow required tax years stipulated by the Internal Revenue Code and Income Tax Regulations unless they request a change from the IRS
Apart from tax regulatory requirements, the other main consideration when deciding whether to go with a fiscal year is your business model. Businesses that experience heavy seasonal fluctuations in activity and revenue may find it advantageous to adjust their accounting and tax reporting cycles to fit seasonal cycles.
For example, retail businesses may prefer to delay tax reporting until after the holiday sales rush and year-end inventory counting is over. A company that isn’t expecting most of its annual revenue until a certain month may prefer to delay tax reporting until after that time. If you aren’t bound by tax regulations to follow a certain cycle, consider whether fiscal or calendar year reporting would be better for your business model.
Why Would a Small Business Use a Fiscal Year?
The main reason for using a fiscal year as your tax year is to adjust your tax reporting cycle to better fit your annual revenue cycle.
There are several reasons you might want to do this, including:
- Your income peaks at a certain time of the year and you want to wait until then to pay taxes to make sure you have enough cash on hand to cover tax obligations
- You want to delay tax reporting until your busy season is over
- You want to delay tax reporting until you’ve had time to finish counting year-end inventory
- Your business is only active certain months of the year
- You want to sync your tax reporting cycles with financing cycles, such as waiting until after a loan or grant comes in
Any of these reasons or combinations of them might lead you to prefer a fiscal year over a calendar year.
What Is the Best Date for My Fiscal Year-End?
The best date for your fiscal year-end normally will be based on your revenue and cash-flow cycles. Plan your fiscal year so that you will have enough cash on hand to pay your taxes. You also may wish to consider when your peak activity season is and when you’ll have enough downtime to focus on taxes.
How To Determine Your Company’s Fiscal Year
Unless you’re required by the Internal Revenue Code or Income Tax Regulations to follow a required tax year, you can determine your fiscal year by filing your first income tax return as a business using the tax year you’ve selected, according to the IRS. After filing your first tax return, if you want to change your fiscal year, you’ll need to follow additional procedures.
How To Change Your Fiscal Year
Changing your fiscal year after you’ve started using it for tax reporting requires you to follow both the agreements governing your business and tax regulations. If your business is a partnership or corporation or multimember LLC, you will need to review whether your contractual agreements with other partners, shareholders or members require you to follow specific procedures for changing your fiscal year.
You also will need to request permission from the IRS to change your tax year to change your fiscal year. The general form for requesting tax year changes is a Form 1128. Partnerships, S corporations and personal service corporations use a Form 8716 for certain circumstances. Rules governing this are complex, so consult an experienced business lawyer to cover your bases.
Optimize Your Fiscal Year to Support Your Tax Strategy
Fiscal-year tax reporting represents an alternative for businesses that don’t end their tax years on calendar year cycles ending Dec. 31. Whether using a fiscal tax year is right for you depends on if your business structure is subject to regulatory restrictions and if your business model is subject to seasonal revenue fluctuations.
If you aren’t obligated to go with a calendar year tax cycle for regulatory reasons, consider whether a fiscal year cycle would help your financial planning and tax planning. Your accountant and business lawyer can help you weigh your options.